The Motley Fool Glossary

Definitions D - G

D

Daily high
The highest price reached by a stock (or index or commodity) during a given day. See also: Daily low.
Daily low
The lowest price to which a stock (or index or commodity) dropped during a given day. See also: Daily high.
Date of record
The date on which a company draws up the list of stockholders who will receive a dividend.
Day order
A buy or sell order that, if unfilled, expires automatically at the end of the day on which it was placed. Orders to your broker are day orders unless otherwise specified. See Good-till-canceled order.
Day trader
Day traders are in and out of the market many times during the course of one trading session and often do not hold a position in any stocks overnight. This approach generates a lot of commissions and portfolio turnover, and denies the day trader the ability to participate in the long-term creation of wealth through compounded growth. It also makes for a lot of time in front of a computer.
Days sales outstanding (DSO)
A measure of how long it takes a company to collect money that it is due. The formula to calculate DSO for one quarter is: accounts receivable / (sales / 90).
Days to cover
A measure of how many shares of a company have been sold short. It is calculated by dividing the number of shares sold short by the average daily trading volume. When you short a stock, you want the days to cover to be low, around seven days or less. See Shorting Stocks.
Debenture
A debt obligation that is not backed by collateral.
Debt
A liability that must be repaid.
Debt-equity swap
A transaction in which a corporation exchanges newly issued stock (equity) for already existing bonds (debt).
Debt-to-equity ratio
Calculated by dividing long-term debt by shareholders' equity. A measure of a company's leverage, this ratio shows the relationship between long-term funds provided by creditors and funds provided by shareholders. A high ratio may indicate high risk, and a low ratio may indicate low risk.
Decile rank
A rating on a scale of 1 to 10; 1 is best, 10 is worst, and each number corresponds to an increment of 10 percent.
Declaration date
The date on which a company's board of directors sets the amount of the next quarterly dividend. Typically it is many weeks in advance of the actual payout date.
Deductible contribution
A tax-deductible contribution to a retirement plan.
Default
Failure to make a payment, of either principal or interest, when due.
Defined benefit plan
A retirement plan that pays a specified amount to former employees, typically based on the number of years of employment and on the average salary in the years just before retirement. Commonly known as a pension, a defined benefit plan was the predominant way that workers secured their retirement funds prior to the widespread use of defined contribution plans.
Defined contribution plan
A retirement plan that is funded by contributions made by the employer and the employee. The ultimate value of the plan will be based on these contributions and on the return of the investments chosen by the plan participant. Profit sharing plans, 401(k)s, 403(b)s, and 457s are defined contribution plans.
Depreciation
A decrease in the value of an asset, such as buildings or equipment.
Derivative
A financial contract whose value is "derived" from an another security, such as stocks, bonds, commodities, or a market index such as the S&P 500 or the Wilshire 5000. The most common types of derivatives are options, futures, and mortgage-backed securities.
Discount broker
A brokerage that executes orders to buy and sell securities at commission rates lower than a full-service brokerage. Discount brokers are certainly favored by Fools. See the Discount Brokerage Center.
Discount rate
The interest rate that is charged by the Federal Reserve Board to member banks for loans. See What Is the Fed?.
Distributions
Withdrawals from a retirement plan or IRA. Also, payments of dividends and/or capital gains by a mutual fund, which can trigger significant tax consequences for an investor. See Mutual Funds:Taxes.
Diversification
Investing in separate asset classes (stocks, bonds, cash) and/or stocks of different companies in an attempt to lower overall investment risk.
Dividend
A share of a company's earnings paid to each stockholder. Typically, dividends are paid on a quarterly basis and are determined by the company's board of directors.
Dividend reinvestment plan (Drip)
The automatic investment of shareholder dividends into additional shares of the company's stock. An excellent investment approach, especially for those with smaller amounts to invest. See Investing Through Drips.
Dividend yield
The annual percentage rate of return paid in dividends on a share of stock. To figure out the dividend yield (or just "yield"), divide the annual dividend by the current share price of the stock.
DJIA
See Dow Jones Industrial Average.
Dogs of the Dow
See Dow Dividend Approach.
Dow Dividend Approach
An investment strategy based on purchasing the highest-yielding stocks in the Dow Jones Industrial Average. See The Foolish Four and Other Dow Investing Strategies, Explained.
Dollar cost averaging
Investing equal amounts of money at regular intervals. The money deducted from your paycheck if you participate in your company's 401(k) program is an example of dollar cost averaging. Theoretically, you will buy more shares when the price of your investment has declined, and fewer shares when the price has risen. This may lead to an overall cost basis that is lower than the average price per share.
Dow Jones Industrial Average
The oldest and most widely known index of the U.S. stock market, the Dow represents the price movements of the 30 companies that, in the opinion of the editors of The Wall Street Journal, most represent the American economy.

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E

Early withdrawal penalty
A penalty imposed for withdrawing money from a fixed-term investment before the term is complete. For example, cashing in a certificate of deposit (CD) before its maturity triggers an early withdrawal penalty.
Earnings
The money that is left over after a company pays all its bills. Also known as net income or net profit, earnings are reported on a quarterly basis by all publicly traded companies.
Earnings per share (EPS)
A company's earnings, also known as net income or net profit, divided by the number of shares outstanding.
EBITDA (earnings before interest, taxes, depreciation, and amortization)
Otherwise known as the middle line or operational cash flow, it is not a replacement for earnings per share. Rather, it is a crucial ingredient, along with the company's debt, in evaluating the company. See Cash Flow-Based Valuations.
Education IRA
A savings account with significant tax advantages designed for use in paying for a child's college education. See Education IRAs.
Efficient market theory
A theory stating that stock prices perfectly reflect all market information that is known by all investors. The theory also states that no investor can beat the market's returns through skill because it is impossible to determine future stock prices, and that luck explains why some investors beat the market. The theory is much debated.
Emerging markets fund
A mutual fund that invests in countries with developing economies such as those in Latin America and Asia (excluding Japan). Emerging markets funds tend to be quite volatile due to political and economic instability.
Employee contribution
An employee's deposit to a company retirement plan. Distinguished from the company's contribution, such as a "company match" to a 401(k).
Employee Stock Ownership Plan (ESOP)
A retirement plan that invests in the employer's stock for the benefit of employees.
Employer matching contribution
The amount that a company contributes to an employee's retirement account, usually as a "match" of some percentage of the employee's contribution. See Defined contribution plans.
Equities
Shares of stock in a company. Because they represent a proportional share in the business, they are "equitable claims" on the business itself.
Equivalent taxable yield
The yield required from a taxable bond to give the same after-tax yield as a tax-exempt bond.
ESOP
See Employee Stock Ownership Plan.
Estate planning
More than just the writing of a will, estate planning is the preparation of a plan to carry out an individual's wishes as to the disposition of her property before or after her death. See Retiree Portfolio Archives for discussions of such topics as revocable living trusts, living wills, and designating IRA beneficiaries.
Estate tax
The tax imposed on assets inherited from an estate that exceeds the federal tax unified credit. Estate taxes can take up as much as 55% or more of an estate that has not been properly planned. See Retirement Planning, Step 11: Keep It in the Family.
Even lot
A grouping of shares of stock divisible by 100 (e.g., 100, 200, 500, 1000).
Ex-dividend date
The date during the quarter by which you must own a stock to receive its quarterly dividend payout. The term "ex" means out or without, as all you Latin scholars know. So, on the ex-date, you buy the stock without the dividend. Obviously, the company needs some time to get its records straight; it cannot pay the dividend to someone who buys the stock the morning the checks go out.
Expense ratio
The percentage of a mutual fund that is taken out of the pockets of shareholders to pay expenses -- most of which go to the salesmen and managers of the mutual fund. If you are investing in mutual funds, look for funds with an expense ratio of less than one percent. See Mutual Funds: Expense Ratios.

F

Face value
See Par value.
Fannie Mae
See Federal National Mortgage Association.
Federal funds
Federal Reserve deposits that banks and other financial institutions "borrow" from one another to meet short-term cash needs. See What Is the Federal Reserve?.
Federal funds rate
The interest rate that is charged by banks on overnight loans to other banks.
Federal Home Loan Mortgage Corporation ("Freddie Mac")
A publicly traded corporation that provides funds for mortgages, and buys mortgages from banks and re-packages them as mortgage-backed investments.
Federal National Mortgage Association ("Fannie Mae")
A government-sponsored private corporation authorized to purchase and sell mortgages, which increases the affordability and availability of mortgages. Also charged by the federal government with facilitating the orderly operation of a secondary market for home mortgages.
Federal Open Market Committee (FOMC)
The 12-member policy-making arm of the Federal Reserve Board. It sets key interest rates, such as the discount rate, and buys and sells government securities, which increases or decreases the nation's money supply.
Federal Reserve
The central bank of the United States. The Federal Reserve (or "Fed") oversees money supply, interest rates, and credit. The Federal Reserve System is governed by a seven-member board. There are 12 regional Federal Reserve Banks and 25 branches in the system. See What Is the Fed?.
Fee-only compensation
An arrangement in which a financial adviser charges by an hourly rate, or by an agreed upon percentage of assets under management, rather than on a commission basis.
Fiduciary
An individual, corporation, or association that is charged with managing or investing another's assets.
FIFO
First in, first out, usually regarding the sale of stock. Unless otherwise specified, the specific shares sold in an account will be the first shares that were bought.
Fiscal year
A 12-month accounting period.
Fiscal year-end
The end of a 12-month accounting period.
Fixed-income fund
A mutual fund that invests in bonds, CDs, preferred stock, or other fixed-income instruments.
Foolish Four
The Fool's variation on Dow dividend investing. The Foolish Four strategy concentrates on large-cap stocks with high dividend yields. See Foolish Four Portfolio.
401(k)s, 403(b)s, and 457s
Employer-sponsored retirement plans named after the respective Internal Revenue Code sections in which they appear. Given their tax advantages and the possibility of employer matching (read: FREE MONEY), these plans are well worth considering. For-profit entities offer the 401(k) plan, nonprofits have the almost identical 403(b) plan, and local and state governments offer the 457 plan. See Is Your 401(k) Foolish?.
Freddie Mac
See Federal Home Loan Mortgage Corporation.
Free cash flow
The cash that's left over after everything -- bills from suppliers, salaries, expenses for the annual holiday bash, new equipment to expand the business -- is said and done. Theoretically, free cash flow is the amount of cash a business could issue to shareholders in the form of a dividend check. See Cash Flow-Based Valuations.
Front-end load
A sales commission charged by a mutual fund, typically around 5%. See The Truth About Mutual Funds: Loads.
Full-service broker
Full-service brokers earn commissions for each trade made in a customer's account. They make more money by trading in and out of lots of investments. They are sometimes referred to as "full-price brokers." See Eyes on Brokers.
Fundamental analysis
The method of evaluating a company by assessing its financial statements, earnings, sales, and management. See Technical analysis.
Futures/futures contracts
A contract to buy or sell an amount of a commodity for a specific price at a specific point in the future.

G

GDP
See Gross Domestic Product.
GIC
See Guaranteed Investment Contract.
Ginnie Mae
See Government National Mortgage Association.
Global fund
A mutual fund that invests anywhere in the world, including the U.S.
GNP
See Gross National Product.
"Going public"
Performing an initial public offering. That is, offering shares of your company to the public so that they may buy them.
Good-till-canceled (GTC) order
An order to buy or sell a security that remains operative until the order is executed or canceled. This is an order that does not expire if not exercised during the day it is made as with the case of a day order. See Day order.
Government National Mortgage Association ("Ginnie Mae")
An agency within the U.S. Department of Housing and Urban Development (HUD) that buys mortgages and pools them to form securities that are then sold to investors.
Gross Domestic Product (GDP)
The value of all goods and services provided within the borders of a nation. In the United States, GDP is determined quarterly by the Department of Commerce.
Gross margin
A percentage of how much of each dollar of sales is left over after the costs to make the product are subtracted. It is calculated by dividing gross profits (sales minus cost of goods sold) for a period by the revenues for the same period.
Gross National Product (GNP)
The dollar value of all goods and services produced in a nation's economy. It includes the income from goods and services produced abroad. The GNP adds to the Gross Domestic Product (GDP) of a country the income of domestic residents as a result of investments abroad, and subtracts the income earned in domestic markets that goes out to foreigners abroad.
Growth and income fund
A mutual fund that pursues long-term growth of capital as well as current dividend income from stocks. This would describe virtually all stock mutual funds to some degree, but the term is used to designate a fund that expressly dedicates a portion of its assets to stocks that pay higher dividends.
Growth stocks
Companies believed to be growing earnings and sales faster than the average company in the market. Growth stocks usually pay little or no dividend, as they are still at a stage in their businesses where they are reinvesting most or all of their earnings into the further development of new areas of the business.
Guaranteed Investment Contract (GIC)
Often a choice for 401(k) plan participants, though not a very good choice for those that are not close to retirement. A GIC is an agreement between an insurance company and a corporate profit-sharing or pension plan that guarantees a specific rate of return over the time span of the agreement. However the specific rate of return will not be very competitive with the historic rate of returns for stocks. See 401(k) choices.